Airbus Hopes For Tianjin Extension By Year-End

Airbus has been hugely successful in selling its aircraft in China lately. Broad market penetration now forms the basis for negotiations to extend and expand the Tianjin final assembly line for which a new agreement could come before year-end.

Airbus, the Tianjin Free Trade Zone and Avic, the shareholders in the Chinese final assembly line (FALC), are in “quite advanced negotiations” to extend the agreement, according to Airbus China Chief Operating Officer Rafael Gonzalez-Ripoll. He is “pretty sure” that a deal can be signed in the next few weeks or couple of months. However, the negotiations have been dragging on since they began in 2012.

Airbus started building A319s and A320s in the Chinese city in August 2008 and the first aircraft, an A320, was delivered to Sichuan Airlines in June 2009. Since then, 143 aircraft have rolled off the final assembly line, and production has been ramped up to the rate of four per month. The original contract, which expires in early 2016, envisages the production of 284 aircraft. A new agreement would likely cover a longer period than the five-year limit of the original. Airbus holds 51% of the joint venture; the Tianjin Free Trade Zone and Avic control 49%.

A new final assembly deal for Tianjin would likely differ significantly from the first. It would include production of the A320neo, which will first be delivered toward the end of 2015. Airbus China President Eric Chen says it would “make sense” to include the A321 in the Tianjin portfolio as well. Such a change seems almost mandatory, given the fundamental shift in demand away from the A319 to the larger A320 and the A321. Airbus is building up production capabilities in Hamburg for the A321 to achieve a rate of 18 aircraft per month.

The manufacturer produces 42 single-aisle aircraft per month now. “There is a clear message delivered by the market,” Chen says.

Airbus does not plan to go beyond 42 until the transition from the current A320 to the neo has been achieved. But if demand continues to be high, Tianjin could play an important part in the group's ability to do so. Chen indicates that increasing Tianjin's production rate beyond four aircraft per month is also being discussed with the Chinese partners. “Why not increase the production rate beyond four?” he asks. In 2013, 130 aircraft are to be delivered to China; far fewer than half of that demand (46) will be built on the FALC.

While the initial unit costs were higher in Tianjin than on the European final assembly lines because of the low output and necessary learning curve, Airbus officials say the cost has been “significantly reduced” while not specifying whether Tianjin actually meets Toulouse or Hamburg unit costs.

The FALC may be the most prominent example of Airbus's industrial initiatives in China, but there are others. The Harbin Hafei Airbus Composite Manufacturing Center (HMC), a joint venture established in 2007 by Airbus and several Chinese partners, including the local Avic branch, is slated to become the sole supplier for Airbus A350 elevators and rudders by 2017. The company started delivering elevators two weeks ago. Airbus holds a 20% stake in HMC, which specializes in composite components and has 360 employees, most of them local. HMC plans to increase its staff to 600 once production fully ramps up.

HMC started gaining composite and Airbus expertise by delivering A320 rudders, spars and elevators, initially not as a sole supplier. That part of the business is to be greatly expanded in the next few years in parallel with the A350 work.

Four elevator shipsets are to be handed over to Aernnova, the Spanish aerostructures specialist that has contracted with HMC. Twelve shipsets are due next year and HMC has committed to supply 13 per month in 2017.

Airbus argues that success in China must be measured in market penetration rather than in production costs. The manufacturer has delivered more than 600 aircraft to China in the past seven years, and its market share has grown to 50% this year from 6% in 1995. The in-service fleet approaches 1,000 units and, figuring in the current backlog, it will reach 2,000 by 2020, Chen predicts. China represents 24% of the global Airbus production now.

But there are still some problems. Airbus has only sold a minimal share of its A320neo backlog to Chinese airlines. The five-year central planning cycle that governs Chinese aircraft orders prevented them from securing A320neo production slots, which are sold-out for years to come. The same problem is hitting the A350 program, for which there are no Chinese orders yet. The first open A350 production slots are available in 2020, and that is only after the end of the next five-year plan. Unless the Chinese government allows its airlines to order aircraft earlier and deviate from the current planning process, they run the risk of losing access to A350s even then.

Chen says the recently announced regional version of the A330 “is what the market needs.” He considers the aircraft to be ideal for the 2-5-hr. flights typical of long domestic and regional international routes. “Look at [air traffic control] and imagine how to double the traffic,” Chen hints. In his view, China's ATC constraints mean capacity expansion can only come through operating larger aircraft.